U.S. sues to stop AT&T from buying Time Warner

Chief Executive Officer of AT&T Randall Stephenson speaks during a press conference in New York City on Monday. (REUTERS/Shannon Stapleton)

WASHINGTON — The U.S. Department of Justice sued AT&T Inc. on Monday to block its $85.4 billion acquisition of Time Warner Inc., saying the deal could raise prices for rivals and pay-TV subscribers.

The lawsuit is the first major challenge to a merger by the administration of U.S. President Donald Trump, who has repeatedly criticized Time Warner's CNN news unit and announced his opposition to the deal last year, saying it would concentrate too much power in AT&T's hands.

The Justice Department argued that AT&T would use Time Warner's films and movies to force rival pay-TV companies to pay "hundreds of millions of dollars more per year for Time Warner's networks" in its lawsuit filed late Monday in federal court in Washington.

The government also argued that the deal would slow the industry’s transition to online video and other new distribution models.

AT&T, which sees the deal as a way to compete against emerging technology companies such as Netflix Inc.and Amazon.com Inc.'s Prime Video, described the lawsuit as "a radical and inexplicable departure from decades of antitrust precedent.”

AT&T head lawyer David McAtee said so-called vertical mergers, between companies that are not direct competitors, are routinely approved.

"We see no legitimate reason for our merger to be treated differently,” said McAtee, adding that AT&T is confident a judge will reject the Justice Department’s case. The Obama administration approved a similar vertical deal in 2011 to allow cable company Comcast Corp to acquire NBCUniversal.

The legal challenge ramps up hostilities after AT&T rejected the Justice Department's demand earlier this month to divest its DirecTV unit or Time Warner's Turner Broadcasting — which contains news network CNN — in order to win antitrust approval.

The move may be a pointer that the Trump administration will look closely at other big merger deals.

Time Warner's shares dropped 1.1 percent to close at $87.71, while AT&T shares closed up 0.4 percent at $34.64.

Video bundling

The No. 2 U.S. wireless carrier struck a deal in October 2016 to buy Time Warner, which also owns the premium channel HBO and movie studio Warner Bros, so it can bundle video entertainment on its mobile service.

The Justice Department's lawsuit cited internal Time Warner documents that said long-term contracts to host live sporting events like college basketball and baseball would help allow it to achieve "targeted rate increases."

The lawsuit also said AT&T and Comcast, which control almost half of the pay-TV market, "would have an increased incentive and ability to harm competition by impending online competitors they consider a threat."

Aside from Trump and the Justice Department, the deal is also opposed by an array of consumer groups and smaller television networks.

"Blocking this merger is the right thing to do — and we hope the Justice Department is doing it for the right reasons," said Craig Aaron, president of advocacy group Free Press, which opposes media industry consolidation. "This deal would give AT&T way too much power to undercut competitors and raise costs on TV viewers and internet users everywhere."

Reuters reported earlier this month that the Justice Department believed the merger would raise costs for rival entertainment distributors and stifle innovation and could allow AT&T to withhold key content from HBO, CNN or other of its channels from competitors.

Last week, the Justice Department had approached 18 state attorneys general asking them to join the challenge of the deal, but as of Monday none had publicly agreed to do so, Reuters reported.

During his campaign, Trump said that reporters had covered him unfairly and has continued to attack CNN as President, which he has labeled as "fake news." He has not commented on the AT&T deal since his inauguration in January.

U.S. Attorney General Jeff Sessions declined to say last week if anyone from the White House had discussed the merger with any Justice Department officials.